Special investment vehicles (SIVs) have become popular in recent years as a way for companies and investors to raise capital and manage risk. SIVs are created as separate legal entities that purchase assets and issue securities backed by those assets. The pricing of SIV securities is important for both issuers and investors to understand. This article will examine how SIVs work, their benefits, and pricing considerations.
SIVs allow customized investment exposures
SIVs provide a flexible structure to create customized exposures for investors. The assets held by the SIV can be tailored, such as loans, bonds, derivatives etc. This allows the SIV to offer securities with unique risk/return profiles. Investors can gain focused exposures that may not be available in traditional funds.
SIV securities are priced based on underlying assets
The securities issued by SIVs are priced based on the value of the underlying assets held. The net asset value of the SIV portfolio is a key input. Also important is the priority of claims of the various securities issued. Senior securities get priority over residual equity interests. Credit risk, interest rate risk, prepayment risk all factor into pricing.
Complex SIV structures create pricing challenges
While the basic principle is easy to state, actual pricing can be quite complex in practice. SIVs are often structured with multiple tranches of debt and equity interests. Waterfall calculations must properly account for performance fees and other subordinate interests. Difficult-to-value assets like derivatives add uncertainty. Professional valuation expertise is essential.
Liquidity risks lead to pricing discounts
Liquidity also impacts pricing of SIV securities. Since there is no active secondary trading market, the securities trade at a discount to NAV. The discount provides a risk premium to compensate investors for lack of liquidity. Discounts may rise significantly in times of market stress when traditional sources of capital withdraw.
In summary, SIVs allow customized exposures for investors, but their complex structures and illiquid securities make pricing challenging. Underlying asset values drive pricing, but appropriate discounts for risks and lack of liquidity must be accounted for.